The studios were preparing to cut and run from digital distribution in fall 2009, the last time I spoke at length with Eric Garland, CEO and co-founder of Big Champagne.

Eric Garland, CEO of Big Champagne, says the Internet gives audience too much power for the studios to ignore digital.

Big Champagne tracks the legal and illegal consumption of digital media online and sells the data mostly to music labels and film studios. Few people possess such a clear view of how the digital strategies employed by entertainment companies are faring.

On a visit to Los Angeles last fall, I discovered a film industry with growing skepticism about the Web as a distribution tool. The legal services weren't generating much cash. Piracy had branched out from BitTorrent to illegal sites that streamed video to people, eliminating the need for downloads. Based on his decade of experience and his experiences with the music industry, Garland predicted that the film industry would start digging its heels in on Web-based distribution and either ignore it or attempt to thwart it outright.

He made that prediction based on how he saw the music industry react in roughly the same stage of its digital evolution. But then, the film studios began cutting huge licensing deals with Netflix and began talking about distributing "premium video-on-demand" while films were still in movie theaters--traditionally a sacred period for Hollywood. In a new interview with CNET, Garland discussed the events of the past year and how they led to changes at the studios.

Q: Are the studios worried about losing control of their Web distribution?
Garland: There has always been a lot of hedges built into their business. The scariest thing, the most threatening possibility is the scenario where those windows [Hollywood's term for periods when specific distribution methods have access to a film] get collapsed and therefore the premium value of your content never really has an opportunity to demonstrate itself in the marketplace. This is one of the reasons why "The Hurt Locker" is such an emotional hot button for those involved and the industry overall because that picture was available everywhere for free online before its value had been demonstrated to any audience. Think about that. That's profound. That film was in the can. Every bit of emotional impact was already on film. Every bit of societal relevance was already wrapped. That beautiful film already existed in the world. But before anyone had recognized that, before that picture had a chance to demonstrate how it important it was, it was already free online.

"The Hurt Locker" is a great little case study for the larger context because it's an example where I think everyone can agree: the Internet destroyed that film's economic opportunity.

Why do we care about that? Because that's the basis, that is the process, that is the basis for valuing everything that Hollywood or the independent filmmakers do. What happens is, when you're able to control the distribution of content..."The Hurt Locker" starts winning awards, starts getting critical accolades. People say this little movie is not a little movie. It's a really important film. That anticipation and interest means that when you remove the scarcity in the market you have this pent up interest and attention and it hits hard and fast and expresses itself in terms of dollars. If throughout that process, people start to recognize the importance of "The Hurt Locker" and that's for free online...[then] by the time the value has been demonstrated, the product has already been consumed. And so you have no barometer in terms of international distribution....

In terms of expanding the limited release in North America, the value of the film is this: that period of proving the value of content is critical to the process of getting a good return on your investment. "The Hurt Locker" is a great little case study for the larger context because it's an example where I think everyone can agree: the Internet destroyed that film's economic opportunity. That's why everyone involved was so upset. They really were robbed.

So Hollywood lives in terror of those types of scenarios, where they really don't have an opportunity to hold back certain types of consumption of the product in certain areas of the globe long enough to build audience, word of mouth, and value. That psychology is what would lead to the music industry all over again. Let's just hold everything back. Let's become protectionist. Let's become aggressively anti-pirate. All of those things are understandable. Psychologically, we can empathize with that, but all of those things are really bad for the future of the market. So, coming back to your question, what happened with things like Hulu and Netflix?

Well, for a time, the focus, the psychology of the business was all about: what harm might these new models might be doing to our economic underpinnings? Or put another way: how might these things be creating an epidemic of Hurt Lockers? Where content is devalued right out of the gate, where people become accustomed to having access to everything, everywhere, all the time, and for very little money.

You remember that moment because that's when there was this flurry of news and gossip about how the studios were questioning the value of these things. I think it happened first with Hulu, when Fox got really unhappy and pulled [three seasons worth of episodes of the FX show "It's Always Sunny in Philadelphia"] out of the Hulu pool. But thankfully for the industry, something else has won out in terms of the strategic thinking about this. That is [that] the greater fear won out: if we don't start to change the way we distribute our content and if we don't start to meet the consumers' needs it doesn't mean that distribution doesn't change or that consumers needs aren't meant. It means that someone else will drive that revolution and that's worse.

The audience now is too powerful in the conversation. They have too much leverage. They are going to consume media on their terms. They can't be dictated to the same way as in the past.

They know that this isn't going to happen without them taking some hits and that the process will likely impact the bottom line?
Garland: That is true more true now than ever. There is a lot of evidence in the market that the studios are well aware of that. The business of film and to a degree ...the business of TV understand that there will have to be changes, have to be concessions, there are going to be some self-inflicted wounds in terms of having to do some things that do threaten long-held evergreen businesses, but that those wounds have to be self inflicted. They understand that they have to drive this revolution, we have to drive this change, and we have to meet the wants and needs of our customers because saying no is not an option.

The audience now is too powerful in the conversation. They have too much leverage. They are going to consume media on their terms. They can't be dictated to the same way as in the past. You're going to see particularly from big indies and small majors in the studio system some shocking risk-taking in the upcoming release slate. Over the next few months and into next year, you're going to see something that I would have told you even six months or a year ago was not going to happen. That's in terms of collapsing windows. That's in terms of simultaneous day and date releases on Internet or on VOD and theatrically. [It's] in some sense impossible given the current interdependent pieces.

Assess the studios strategy for me. Give them a letter grade
Garland: I think first we have to decide what my letter grade would have been then. I think I was sort of giving them a C-. And today, they've definitely improved that. Based on what they've done and things we can point to I would say that the industry has learned a lot and has earned itself a solid B-, or C+. But based on some things I believe are coming and coming soon that grade improves. This industry may be earning a B+ or A- soon.

You can't share any of that with me.
Garland: I can't because these are actually things that I only came into because I'm doing some work on them and so I'm NDA'd. But I think what I said gives you directionally what I know, which is that some of the bigger independents and smaller studios are going to do some things that we would not have even imagined when you and I spoke last. And they are the right things and they are not without a risk profile. They're very white-knuckled about it, and I'm trying to be very reassuring about taking some of these risks.

But look, as one studio executive said to me: the problem is the Internet never made a bad picture any better but it appears to have made some good pictures worse. And of course "The Hurt Locker" is a good example of that, but there are lots of them. But I think it's that first statement that is so telling. Of course the Internet hasn't made a bad film better. And it never will, because the Internet is some kind of combination of truth serum and unadulterated access. So yeah, if it's not any good the audience will say not nice things about it and if they're interested in seeing it, they'll see it for free. That never helps you.

The only scenario where the Internet can be advantageous is if it's marketed online and the movie is great. The problem there is that the traditionalists in the business will say, "It's a great picture and would have performed even better without all that Internet nonsense."

And so it's a very hard case to make to the protectionists in the building, but they're doing it, and sometimes on a smaller scale than we'd like but they have to mitigate that risk. But let's get back to your question about how they are doing. Hollywood has possessed great might and influence [in Washington]...[and more] than their baby cousins in the music industry. And so they continue to aggressively pursue legislation that will protect them from the pirate market. I'm not suggesting that they shouldn't, but I don't think that's a vision. It's a strategy and tactic for now and it's a good one. If they can exert that influence and secure help, they should. But all too often, industries stop there. They knock off for the day and say, "OK, I've done my job in protecting the DVD business and existing market." That's at best 49 percent of your mandate because your controlling mandate is to build the thing that replaces the business that you now have to acknowledge is in full-blown decline.

That's a very difficult mandate, right? You have to be the instrument of your own demise in some sense, of your earlier incarnation's demise. That's tough, but they're doing pretty well with that at this moment. But if they get stung or if they feel that they experimented and lost, [then] the concern is that they retrench. But at this moment, they're looking pretty smart. And Netflix is a huge part of that strategy. I think Google TV and Apple TV and platforms like them will also be a huge part of that strategy.

I never thought the studios would ever risk angering the theaters owners.
Garland: Certain types of pictures are aimed at certain types of demographics. They don't really have the option to continue saying, "No, we can't." That has to turn into "We'll try."

What's your contribution and the contribution of other technologists they work with to the change in thinking among the studios?
Garland: I don't ever want to pretend to have had influence that I can't possibly validate and claim but I've always given the studios a good measure of credit for studying their history and for finding companies like ours that have now more than a decade of that history quantified in terms of the digital transition for the music industry. Without exception, all of the major players in Hollywood took an early and sincere interest in opportunities to examine case studies from the past and to look at their own content in the online market place and try to find the lessons. We've been working with Hollywood for a couple of years now and in some cases more than a couple of years and they are proving to be good students of history.

I'll tell you this though, the least enviable job at any studio now is one that intersects directly with the traditional distribution machine. If you are in the home video or home video sales area of a studio, it is almost an impossibly difficult time in terms of your strategic direction because quarter by quarter your first responsibility is to do anything and everything you can to ensure that people buy the shiny disc. And most everything you and I have talked about in this conversation and the prior one comes with some degree of compromise for the disc, or threatens sales of the shiny disc and so that's an identity crisis for studios and big swaths of the people they employ: "What is my responsibility, to save our quarter, our year or our industry? Well, I've got to try and do it all, even when those things are explicitly at odds."

You would have to go out into the world and say: "Time out. For the next four quarters, please, everyone be patient. I only want to be judged and compensated based on percentage growth or incremental growth in this tiny little backwater called online distribution..." Nobody could make that pitch. It's a crazy pitch. But I think that's the right pitch."

In the end, these executives are judged and compensated based on growth and protectionism on a quarterly basis. By the numbers, there could be one strategy; that is extend and pretend. Rationally, we all know that this isn't a good course. We'll fly into the mountain pretty quickly if that's the course. But that's the course. At Christmas, what's your bonus based on? It's based on whatever you manage to eke out of that traditional home video marketplace if you were that executive.

So you would have to go, not to your boss or stakeholders or shareholders, but you would have to go out into the world and say: "Time out, for the next four quarters, please, everyone be patient. I only want to be judged and compensated based on percentage growth or incremental growth in this tiny little backwater called online distribution. There isn't going to be any money in it. And because it's going to steal focus and attention and strategy away from the traditional business, we're going to suffer greatly, but we will have started to build a bridge on which we might just escape unscathed in the midterm or long term." It's a crazy pitch. Nobody could make that pitch. But I think that's the right pitch.

They have to turn their back on revenue and gamble on a digital future and that makes them nervous?
Maybe I have to up their grade once again. Put a plus on whatever grade I gave them before, because the easiest thing for them to do when they get up in the morning is to extend and pretend, and they're not just doing that.

So again, I think it's good strategy to get help [from the government]. They have the muscle and influence to get help. They should seek it, but you can't stop there. I remember those quotes and you can probably dig them up. They either came from some label president or from the Recording Industry Association of America, but the quote was something like, "We can't compete with free. Our efforts right now are focused on ensuring conditions that allow legitimate businesses to flourish." The recorded music industry would talk about that as if that was an end unto itself. That was never enough or going to be enough. You have to put at least as much energy, money, and focus on building the new business as you do into protecting the old business. Hollywood is doing well on that score.

About the author

Greg Sandoval covers media and digital entertainment for CNET News. Based in New York, Sandoval is a former reporter for The Washington Post and the Los Angeles Times. E-mail Greg, or follow him on Twitter at @sandoCNET.
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